Informist, Friday, May 24, 2024

By Priyasmita Dutta and Sagar Sen

NEW DELHI – Ujjivan Small Finance Bank plans to diversify its portfolio to meet the Reserve Bank of India's conditions to transition into a universal bank, says Managing Director and Chief Executive Officer Ittira Davis.

"There are a whole list of reasons why we should be getting a universal bank licence," Davis tells Informist in an interview. "...there is also a requirement that as a small finance bank we have to write 'small finance bank' under our name. Depositors ask what a small financial bank is...is it different?...what are the implications? As a universal bank, we don't have to write 'small finance bank' under our name. We just call ourselves Ujjivan Bank," he says.

According to the Reserve Bank of India's notification on the voluntary transition of small finance banks to universal banks, those with diversified loan portfolios will be preferred. "The condition of the RRBI says you have to have a diversified portfolio. There is no condition that you have to cut down on microfinance," Davis says.

"I think that the word diversification has to be looked at from a broader banking perspective. In particular, we also are not just looking at the asset side. As a bank, we also have a deposit side. And we are well diversified on that, and we provide a lot of services."

Davis says that as part of the diversification, the bank aims to increase its secured portfolio to 40% from just over 30%. "We are adding 3-4% every year. So, I think it is not a problem to get to 40%. We have a good housing (portfolio). Last year, our housing grew 45%. That is bigger than the overall loan growth. Overall growth of the assets was 24%.

"We believe 40% is a good number. We don't need to go to 50-60?cause we are focused on financial inclusion. So, having a 60-40 mix, we believe is good and once we get there, that's a fairly good diversification on the asset side."

Ujjivan Small Finance Bank has met all the conditions to be eligible for a universal bank licence. Some key parameters stated by the RBI are reporting a net profit for the two previous financial years and having gross and net non-performing asset ratios below 3% and 1%, respectively, for the two previous financial years, and a capital-to-risk-weighted assets ratio of 15%.

For 2023-24 (Apr-Mar), Ujjivan Small Finance Bank's net profit was 12.82 bln rupees, against 11 bln rupees a year ago. As of Mar 31, the small finance bank's gross and net non-performing asset ratio were 2.1% and 0.3%, respectively, and the capital-to-risk-weighted assets ratio was 24.7%, which meant the bank met all parameters.

Davis says the small finance bank may also consider expanding its presence in a few states, especially those where it has just over 5% exposure. "I can tell you that one of the things we may be looking at is, while we say that we are not more than 15% in any state, we may want to increase the number of states where we have 5% or more exposure, assets and liabilities combined," he says.

Currently, Tamil Nadu has the highest share of 14.1% in the small finance bank's gross loan book, followed by Karnataka with 13.1% and West Bengal with 11.9%. Ujjivan Small Finance Bank plans to open 50 new branches in the second half of the current financial year, Davis says.

Following are edited excerpts from the interview:

Q. Recently you said you would transition into a universal bank and that the board would take a call on this. What are some of the benefits you expect from the transition?

A. There are a whole list of reasons why we should get a universal bank licence. The first is that capital requirement is lower for a universal bank compared to a small finance bank. The second is that the 'priority sector lending' requirement for a small finance bank is 75%, whereas for a universal bank, it is 40%. Also, 50% of our portfolio as a small finance bank has to be for loans less than 25 months; this condition also goes away as a universal bank. But more than that, there is also a requirement that as a small finance bank we have to write 'small finance bank' under our name. Depositors ask what a small financial bank is...is it different?...what are the implications? As a universal bank, we don't have to write 'small finance bank' under our name. We just call ourselves Ujjivan Bank.

These are important conditions when you look at the marketplace and also the way people look at the placement of funds. Then, there will be other secondary issues that are not that important, but which will also play out in the bigger scheme of things.

Q. The Reserve Bank of India's parameters for small finance banks to secure universal bank status include having a diversified portfolio. Ujjivan has heavy exposure to micro-group loans or microfinance loans. How do you look at diversifying your loan book?

A. The condition of the Reserve Bank says you have to have a diversified portfolio. There is no condition that you have to cut down on microfinance. I would like to clarify that diversification in banking has multiple meanings. One of the conditions is a secured and unsecured mix.

The way we can justify diversification is that we are in 26 states. Besides, we also have a range of products. So, this word 'diversification' is not unidimensional; it is a multidimensional approach. The word diversification has to be looked at from a broader banking perspective. And in particular, we also are not just looking at the asset side. As a bank, we also have a deposit side. And, we are well diversified on that, and we provide a lot of services.

Q. But if you have to fit into the RBI's definition of diversification as business diversification, would you like to diversify further and how?

A. That is the intention of the board, to review this whole thing and decide as to what sort of strategy will be deployed for diversification. For example, I can tell you that one of the things we may be looking at is, while we say that we are not more than 15% in any state, we may want to increase the number of states where we have 5% or more exposure, assets and liabilities combined. So then, we can say we are present in 10 states with at least more than 5% exposure.

That is one of the things that we have discussed, and we said yes, we should diversify to that extent so that even if the 15% in the top two-three states comes down to 12%, we can add a couple of percentage points, and we will be present in a bigger way in the top 10 states.

The full deployment of diversification will be taken up by the board in the next couple of months, and then, it will decide what we do. But as a strategy, we have already decided that we will bring our secured portfolio up to 40%.

We believe 40% is a good number. We don't need to go to 50-60?cause we are focused on financial inclusion. Financial inclusion adds a larger exposure to the microfinance sector, and we have been in this business for 20 years, first as a non-banking finance company and then as a bank. So we know this segment, and we believe that there is more growth that can come in this segment. Thus, having a 60-40% mix is good and once we get there, that's a fairly good diversification on the asset side.

Q. How much is the secured book right now? You said ideally, you would like to have it at 40% going ahead.

A. Now, it is just over 30%.

Q. Do you see any particular challenges in increasing it to 40% in the near future? And what will the trajectory be like?

A. We are adding 3-4% every year. So, I think it's not a problem to get to 40. We have a good housing (portfolio). Last year, our housing grew 45%. That is bigger growth than overall. Overall growth in assets was 24%. We have relaunched the micro and small enterprises portfolio, which is again a secured portfolio. So, that will pick up speed this year. And we have also added vehicle finance and gold loans, both of which are secured. They will also start making a contribution. So, getting to 40% in a couple of years shouldn't be a problem as far as we are concerned.

Q. What are the challenges you may face if you do not convert to a universal bank?

A. We are already competing against all banks in the deposits business. A customer can deposit with a nationalised bank, they can deposit with a private bank, or they can deposit with us. So, to that extent, we are already competing.

What a universal bank will do is, if we are able to bring down our cost of funds, we will be able to focus the asset business on different segments. We will be able to give better prices. So, there are more opportunities rather than challenges.

Q. Are there any specific strategies you want to implement to bring down your cost of funds?

A. Yes, we are all looking at it. Right now, our current account, savings account is 26%. Ideally, we would like to see it moving up to 30%. It is not going to be easy because there is a scramble for funds in the market. But we believe that our focus on micro, small and medium enterprises and growing the net interest margin will be very important because MSME will be added to the current account.

We are also adding some digital and other services that we can give to our customers, which we hope will increase our CASA from 26% to about 30%.

Q. You said in terms of expansion, you would look at increasing your presence in some states. Which states would you focus more on in the next 8-10 months?

A. Yes, there are some states where we have exposure of less than 5%. So we will be pushing in that direction – like Uttar Pradesh, Haryana, and Rajasthan. We have fairly good exposure in Tamil Nadu, Karnataka, West Bengal and Maharashtra. Gujarat, Bihar, Uttar Pradesh, Haryana, New Delhi and Rajasthan are the five-six states where we can slowly ensure that the exposure goes beyond 5% so that it is meaningful exposure and the diversification is even more broad-based...that we are not just in four-five states in terms of concentration but spread across maybe 10 states.

Q. By expansion, do you mean opening new branches and hiring people?

A. Yes, but actually, during 2023-24, we opened quite a few branches in Uttar Pradesh, Bihar and others. So now, it is a question of using those resources and getting them to use the brick and mortar, services and people there to increase exposure. But it takes a little bit of time for the branch to settle down, break even, and deliver the services. What we are doing this year is trying to focus on the 150 branches we opened in the last two years to provide the full range of services and increase their customer contact to be able to achieve their potential.

We are adding 50 new branches this year and these 50 branches will have to be manned, so to that extent we will have to add some talent and, depending on the strategy that we have in terms of growth, we will add employees. Most of them are in the second half of the year.

Q. Your interest expense was quite high in 2023-24. How do you intend to bring it under control?

A. We are waiting for the RBI to start lowering interest rates, but in the interim, while that's not happening, we will have to manage, because even two weeks ago, State Bank of India raised interest rates for its short-term deposits. So, for everybody, it's a very tight market. We did raise interest rates for deposits in March. We'd like to refrain from increasing them further, but if our competition does it, we have to watch carefully. So, the cost of funds is something that is going to remain reasonably high, but our treasury has now come forward with some new ideas in terms of liquidity management. We hope that in the short run, before the interest rate cycle changes, we will be able to see the treasury liquidity management help us contain some of the cost increases on the funding side. End

Edited by Avishek Dutta

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